A compromise for the tax cut debate

The debate about whether to extend the Bush tax cuts just for the middle class and whether to make the extension temporary or permanent couldn’t be more important. A permanent extension of most or all of them is unaffordable, given looming deficits. But allowing all the tax cuts to expire, given the state of the economy, is unwise.

What to do? President Barack Obama wants to make the middle-class tax cuts permanent. Republicans also want to make the cuts permanent — but for everyone, including the wealthy. Peter Orszag, former Office of Management and Budget director, suggested a compromise: Extend them for everyone, but only temporarily.

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The Orszag plan deserves consideration — if it can be enacted. The problem is that temporary cuts almost always get extended.

So Orszag’s plan may just postpone the decision. And it continues expensive tax provisions that mainly benefit the top 2 percent of the population.

It’s worth considering some alternatives.

The president can keep his promise to the middle class not to raise income tax rates, but he should offset the costs after 2012 by broadening and simplifying the tax base. He has to ensure that the Bush tax cut extension is revenue neutral by 2013 and has to begin to bring in additional revenues over that decade and beyond.

The simplest way to do this is to cap the value of various deductions and then keep them capped in a way that ensures more federal revenue over time. He must also begin to address the explosion of debt caused by the aging of baby boomers and rising health care costs after about 2015.

This proposal needs to be made and passed now. Such caps are likely to be fiercely resisted, but the alternative — a deficit-ballooning extension of the Bush tax cuts — is fiscally irresponsible. By eliminating hidden subsidies that are, in effect, backdoor spending programs, this proposal would also make the entire tax system simpler, more efficient and more pro-growth.

What about the wealthy? Instead of extending their tax cuts, let’s give them a big, but temporary, incentive to spend not only their incomes but some of their wealth — thereby providing jobs for everyone else.